New Gang, Old Myths

And things to look for in
the coming tax debate

by Robert S. McIntyre

The American Prospect magazine,
January 2003

When George W. Bush hired a new economic
team in early December, the press speculated that the change might
bring a glimmer of fiscal sanity to the administration's economic
policies. Don't bet on it. As Stephen Moore of the anti-tax, big-deficit
Club for Growth cult put it, whatever their past records, the
new boys will "drink the Kool-Aid." And sadly, our president
will keep proposing the same solution to every problem: more tax
cuts for the rich. So here are a few things to keep in mind as
this year's tax debate unfolds.

THE MYTH OF THE "DOUBLE TAXATION
OF DIVIDENDS"

The newest item on Bush's tax-cut agenda
is to reduce or end taxes on dividends. This could be very expensive,
not to mention hugely regressive. Most of the $25 billion a year
in tax cuts from wiping out personal income taxes on dividends
would go to the best-off 1 percent of the population. In defense
of this latest upper-income giveaway, Bush invokes tax equity.
Corporate profits are unfairly "double-taxed," he says,
first when companies earn them and second when they're distributed
to shareholders as dividends. This argument, however, has two
defects: It's conceptually unsound and it's factually untrue.

When you think about it, the number of
times something is taxed isn't an enlightening concept. Instead,
it's the total amount of taxes, whatever the number of levels,
that matters. Who wouldn't feel better, for instance, about paying
two taxes of o percent each rather than a single tax of 40 percent?

So the real question is: Does the so-called
double tax on corporate profits cause them to be overtaxed compared
with other kinds of income? It sure doesn't look that way.

Corporations have become extremely agile
and aggressive at avoiding the corporate income tax. Consider
CSX, the company run by Bush's choice for Treasury secretary,
John Snow. Snow brags, in CSX's latest annual report, that his
firm "pursue[s] all available opportunities to pay the lowest
federal, state and foreign taxes ... [and] works through the legislative
process for lower tax rates." As a result of all that clever
accounting and lobbying, CSX paid nothing at all in federal income
taxes on its $934 billion in U.S. profits over the past four years.
Instead, it got tax rebate checks from the Treasury totaling $164
billion. Obviously, CSX s profits can't possibly be double taxed.

CSX's tax dodging may be particularly
egregious, but most other companies do their darnedest to avoid
taxes, too. Last year, less than half of actual total corporate
profits were subject to corporate income tax. And most dividends
are tax-exempt, too, because they're paid to pension funds and
tax-exempt retirement accounts. Bottom line: Last year, barely
more than half of corporate profits were subject to tax at any
level. So the double tax doesn't come close to taxing corporate
profits even once.

If at first you don't succeed, make the
same mistake again.

The so-called stimulus bill enacted in
January of 2002 showered $114 billion in new tax breaks on corporations
over three years, supposedly to encourage more investment. It
was an odd approach, given that overcapacity and lack of demand
were- and are-our problems. The Business Roundtable, which represents
the country's 200 largest corporations (who got most of that money),
sadly reported this November that three-fifths of its members
plan to lay off workers in 2003, and more than 80 percent will
not increase their plant and equipment investments. Those failed
business giveaways were enacted in lieu of a stimulus package
that might have actually done some good by putting money in the
pockets of consumers who'd spend it.

Cutting taxes in 2011 to spur the economy
now?

The other major item in Bush's tax package
would extend his 2001 tax cuts past their scheduled 2010 sunset
date. The president's argument is that rich people will work harder
and save more now if they're assured of tax cuts in 2011 and 2012.
This argument seems perfectly stupid to me, but it's the one dearest
to the president's supply-side heart.

Finally, Bush's previous tax cuts have
already helped produce a pretty simulative fiscal policy. Federal
deficits outside of Social Security are likely to exceed 3 percent
of the gross domestic product this year-considerably more if we
go to war. But because of the president's warped priorities, we've
gotten very limited bang for the buck from all those stimulus
dollars. We could do something more useful to spur the economy,
but to afford it, we'll first have to repeal some of Bush's costly
mistakes.